[BRIEF NOTE] How high will it go?

[rfmcdonald]

Thanks to Jerry for alerting me to the news that, for the first time ever, the Canadian dollar is now worth $1.10 American.

The Canadian dollar's meteoric rise accelerated this week, rising two cents in less than 24 hours.

The loonie broke through the US$1.10 barrier in overseas trading Wednesday, initially hitting the 110.02 cents US mark.

It dropped back down to 109.6 cents US, before taking off again and landing well above US$1.10.

This comes on the heels of yesterday's rise of 1.34 cents US and modern-era record close of 108.52 cents US.

Yesterday, the Bank of Canada's senior deputy governor, Paul Jenkins, warned that the higher exchange rate carried both risks and benefits for Canada, discouraging exports and encouraging imports, decreasing economic growth and increasing wages. The only comfort for Canadians is that we're not alone, as Bloomberg's Agnes Lovasz and Stanley White write in their article "Dollar Slumps to Record on China's Plans to Diversify Reserves".

The dollar fell the most since September against the currencies of its six biggest trading partners after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves.

The dollar fell against all 16 of the most-active currencies, declining to the weakest versus the Canadian dollar since the end of a fixed exchange rate in 1950, a 26-year low against the pound and a 23-year low versus the Australian dollar. The New York Board of Trade's dollar index dropped to 75.21 today, the lowest since the gauge started in March 1973.

``Further weakening of the dollar is very likely,'' said Teis Knuthsen, the Copenhagen-based head of foreign-exchange, fixed-income and derivative research at Danske Bank A/S, the Nordic region's second-biggest lender. China may ``diversify out of dollar holdings.''

The U.S. currency slumped to $1.4704 per euro, the lowest since the 13-nation currency debuted in January 1999, before trading at $1.4671 as of 7:15 a.m. in New York, from $1.4557 late yesterday. The dollar dropped the most in two months against the yen, trading as low as 112.87 yen. The euro fell against the yen to 165.84, from 166.99 yesterday.

The U.S. dollar index may be due for a reversal, according to a technical indicator. Its 14-day relative-strength measure fell to 21.38 today, below the 30 mark, which may signal the currency's decline has bottomed out.

[. . .]

``We will favor stronger currencies over weaker ones, and will readjust accordingly,'' Cheng Siwei, vice chairman of China's National People's Congress, told a conference in Beijing. The dollar is ``losing its status as the world currency,'' Xu Jian, a central bank vice director, said at the same meeting.

The dollar also fell to an all-time low against the synthetic euro, a theoretical value that estimates where the currency would have traded before its inception. The prior record was $1.4557 set in 1992.

The U.S. currency may weaken to between $1.48 and $1.50 against the euro by year-end, Knuthsen said.

Chinese investors have reduced their holdings of U.S. Treasuries by 5 percent to $400 billion in the five months to August. China Investment Corp., which manages the nation's $200 billion sovereign wealth fund, said last month it may get more of the nation's reserves to invest to improve returns.

As for me, all that I can say is that a Canadian dollar that has a new, more-or-less stable exchange rate with the American dollar well in excess of par is a big change--I'm not sure if it has ever been near par in my lifetime. Here's to hoping that everything doesn't fall apart.